Detecting 'Fake' Price Movements: A Convergence/Divergence Indicator

Caporale, Guglielmo Maria; Gil-Alana, Luis A.; Plastun, Alex

doi:10.2139/ssrn.2754622

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Detecting 'Fake' Price Movements: A Convergence/Divergence Indicator

Brunel University London, Economics and Finance Working Paper No. 15-15

24 Pages Posted: 26 Mar 2016 Last revised: 16 Jun 2018

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Luis A. Gil-Alana

University of Navarra - Department of Economics

Alex Plastun

Sumy State University

Date Written: May 25, 2015

Abstract

This paper develops a new pair trading method to detect “fake” price movements and arbitrage opportunities that is based on a convergence/divergence indicator (CDI) belonging to the oscillatory class. The proposed technique is applied to a cross-currency pair (EURAUD, 2010-2015), and trading rules based on CDI signals are obtained. The CDI indicator is shown to outperform others of the oscillatory class and to generate profits (in the case of EURAUD) without the need for incorporating additional algorithms in the trading strategy. The suggested approach is of general interest and can be applied to different financial markets and assets.

Keywords: Pair trading, oscillator, trading strategy, convergence/divergence indicator (CDI)

JEL Classification: G12, C63

Suggested Citation: Suggested Citation

Caporale, Guglielmo Maria and Gil-Alana, Luis A. and Plastun, Alex, Detecting 'Fake' Price Movements: A Convergence/Divergence Indicator (May 25, 2015). Brunel University London, Economics and Finance Working Paper No. 15-15, Available at SSRN: https://ssrn.com/abstract=2754622 or http://dx.doi.org/10.2139/ssrn.2754622